Promoting Financial Inclusion - United Nations Development ...

Act of 1904 which was introduced with
the objective of ‘facilitating promotion of
cooperative societies, for the promotion of
thrift and self-help among agriculturists,
artisans and persons of limited means.’
Cooperative societies were virtually
the only institutions for credit in most
rural areas until the nationalization of
14 banks in 1969. PACS have also been
involved in distribution of agricultural
inputs, subsidised foodgrains and other
essential items to low income rural
families in addition to credit. Even though
the cooperative credit institutions have
remained financially weak, operationally
inefficient and ineffective, their wide
spread in rural areas means that they
continue to be seen as a financial system
with significant potential for enabling the
achievement of financial inclusion.
The government, concerned by
the severe financial and institutional
impairment of the cooperative credit
structure (CCS), set up a task force led
by Prof. Vaidyanathan in August 2004. On
the basis of recommendations of the task
force, it rolled out a revival package aimed
at reviving the short-term rural CCS to try
to turn it into a well-managed and vibrant
medium to serve the credit needs of rural
India, especially for small and marginal
farmers.
The revival package seeks to [Ministry of
Finance, 2005–06]:
• Provide financial assistance, specifically
recapitalization support, to bring the
system to an acceptable level of health;
• Introduce legal and institutional reforms
necessary for its democratic, self-reliant
and efficient functioning; and
• Take measures to improve the quality of
management.
NABARD was designated as the
implementing agency for the revival scheme.
The main aspects of the revival package are
summarized below and details are presented
in Annex 4.
FINANCIAL ASSISTANCE
The first aim of the package is to improve
the financial health of PACS to acceptable
levels and then make interventions with the
upper tier institutions (DCCBs and SCBs).
The package includes assistance necessary to
bring all institutions to a minimum Capital
to Risk weighted Assets Ratio (CRAR) of
7%. The share of state governments in the
equity of all institutions was to be brought
down to 25% with the excess amount of
their existing equity holdings converted
to grants. However, PACS with a recovery
level of less than 30% were deemed to be
too weak to justify revival and hence not
eligible for financial assistance. Broadly, the
package was to provide full capitalization
to PACS with recovery levels greater than
50%. The liability for funding the financial
package was to be shared by the central and
state governments and the CCS based on the
origin of loss and existing commitments.
LEGAL AND INSTITUTIONAL REFORMS
The financial support was to be reinforced
by amendments to various laws including
the Banking Regulation Act (BRA) and
the respective state level Cooperative
Societies Acts to empower the RBI to lay
out prudential norms and management
processes to ensure the institutions’ good
financial health in the context of their role
as deposit takers. The revival package also
suggested some changes in the accounting
system of the upper tier institutions to
allow recovery adjustments of the principal
amount first to cleanse the accounts of any
over dues. NABARD was also assigned
the responsibility of designing a deposit
guarantee scheme for member deposits.
24 PROMOTING FINANCIAL INCLUSION